Time Variations in the Exchange Rate Pass-Through in Japan: A reexamination using the time-varying parameter VAR

Author Name SHIOJI Etsuro  (Hitotsubashi University)
Creation Date/NO. November 2010 10-J-055
Research Project Monetary Cooperation and an Optimal Exchange Rate Basket in East Asia
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This paper reexamines how the influences of the exchange rate on export, import, and domestic prices have evolved over time in Japan. The most important characteristic of the analysis here is the use of the time-varying parmeter vector autoregression (VAR) approach, which allows us to analyze when, and to what extent, changes in the pass-through rate (defined as percentage response of prices to a 1% change in the exchange rate) occurred. The period under consideration is between January 1980 and January 2010. We find the following. First, the pass-through rates on import and domestic prices were both trending down during the sample period. The pass-through rate on domestic prices experienced a large decline during the 1980s, whereas a large decline for that on import prices was observed both in the 1980s and the later half of the 1990s. In contrast, the pass-through rate on export prices generally saw an upward trend, particularly during the 1980s.